NEW YORK: The greenbacks resurgence has more room to run if the currency completes a long-awaited reunion with an old friend: real yields.
The US currencys trade-weighted value adjusted for price pressures may return to post-crisis highs thanks to higher rates on Treasury Inflation-Protected Securities and geopolitical risk, according to Societe Generale SA strategist Kit Juckes.
“The dollars doing a stalwart job of re-coupling with yields and in real effective terms, its not a million miles from getting back to its January 2017 peak,” he wrote in a note on Thursday.
Juckes has long contended that in the long run, real yields — those on TIPS — are a more reliable indicator of a currencys direction than more commonly-cited nominal ones.
The theory goes that higher returns on risk-free rates after inflation increase the appeal of a countrys assets, boosting its currency in the process.
Since both real and nominal yields are higher than January 2017 and the “global economy overall is facing political dangers,” the dollar could return to its cycle peak soon enough, Juckes wrote.
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